prudent investor newsletters

Super Abenomics: Japan’s Nikkei Crashes on Rioting Japanese Government Bonds

noreply@blogger.com (benson_te) — Thu, 23 May 2013 08:23:00 +0000

Just a few days ago, I posted the Economist magazine’s seeming worship of “Abenomics” which featured PM Shinzo Azi as a Superhero.

Sometimes magazine covers can be useful indicators of extreme sentiments or the bandwagon effect via the stages of mania or depression or of crowded trades. Occasionally they serve as key harbingers to major inflection points.

I am not sure if today’s JGB incident represents a major reversal that should usher in a risk off condition, but I am sure that this serves as my alarm bell.

Well, a riot in Japan’s Governments Bonds has sent the Yen in a spike and simultaneously a crash in her stock markets. The Nikkei dived by 7.3%!

First the upheaval in the JGBs.

From the Bloomberg:

Japanese government bonds fell, with 10-year rates touching 1 percent for the first time in a year, on speculation the Federal Reserve will curb stimulus and the Bank of Japan will tolerate an increase in yields.

Japan’s five-year note rate matched the highest in two years after Fed Chairman Ben S. Bernanke said yesterday the central bank may trim bond purchases if policy makers see indications of sustained economic growth. The BOJ injected 2 trillion yen ($19.4 billion) into the financial system to stem volatility following a circuit breaker in JGB futures trading.

The reality is that this has little to do with Ben Bernanke’s latest statement but has everything do with the much touted elixir called “Abenomics”.

The Bloomberg chart of JGB’s 10 year yield has been climbing since the BoJ’s Kuroda announcement to double her monetary base last April. In other words, the yields has remained lofty even when Japan’s government has tried to calm her down by buying them.

Today the BoJ bought a record number of yields in an attempt to assuage the markets, from another Bloomberg article:

The Bank of Japan injected 2 trillion yen ($19.4 billion) into the financial system today to stem volatility, as benchmark JGB yields swayed the most since the day after the central bank announced unprecedented bond buying.

The following table form Bloomberg, shows of the surge across the spectrum of the yields of Japan’s bonds, in a month’s period. This comes with the exception the 2 year yield.

I keep repeating that Abenomics is bound for failure for the simple reason that such policies have been founded on economic inconsistencies and premised on hope on the supposed magic of doing the same thing over and over again and expecting different results:

Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

Next the Japan’s stock market crash has sent almost the entire Asian region in a sea of red as shown by the table above from Bloomberg, both the Nikkei and the Topix were down 7.32% and 6.87% respectively .

Here is the Bloomberg:

Japan’s Topix index tumbled almost 7 percent, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial companies plunged amid rising bond yields. The rout triggered a halt in Nikkei 225 Stock Average futures trading in Osaka.

Consumer lenders lost 11 percent to lead declines among the Topix (TPX)’s 33 industries. Mitsubishi Estate Co., the country’s biggest developer, slid 9.3 percent. Mitsubishi Motor Corp. dropped 14 percent, falling a second day after advancing more than 50 percent in the previous three days. Tokyo Electric Power Co. plunged 13 percent.

And given the stock market’s latest near vertical ascent, the ensuing crash simply accounts as “every action has an equal and opposite reaction”, from the same article:

A measure of share swings surged to its highest in two years. The Topix’s 50-day volatility rose to 28.8, the highest since May 2011, according to data compiled by Bloomberg.

The Topix and Nikkei 225 Stock Average have risen more than 40 percent this year, outperforming all major equity indexes amid unprecedented Bank of Japan easing. The Topix trades at about 1.4 times book value, compared with about 2.5 for the Standard & Poor’s 500 Index and 1.7 for the Stoxx Europe 600 Index.

The coming sessions will be very crucial.

It isn’t the yen or Japan’s stock markets that will be the primary concern rather it is the JGB or Japan’s bond markets that will act as the driving force.

The bond markets has been in a parallel universe or in patent disconnect with the stock markets, where we just saw today the realization of a Wile E Coyote moment.

Previous soaring stock markets amidst unstable bond markets has finally led to a regression to the mean. As today has shown, stock markets are the last to know.

Yet if the BoJ will not be able to tame the bond markets in the coming sessions, despite her intensifying purchases, this increases the risks of a Japan debt crisis, as explained before.

Japan’s debt crisis may come sooner than later. And today may just be a teaser.

The increasing prospects of a Japan debt crisis could herald a return of a global RISK OFF conditions.

On the other hand, if the BOJ continues to massively inflate; such crisis may metastasize into a currency or a yen crisis or a combo of both.

Everything now will depend on the how Japanese policymakers react and how the global financial markets will respond to them. Remember this isn’t just a Japan affair, but given the immense build up of global bubbles, including the Philippines, all it needs is a trigger for all of them to pop. Japan could play such a role.

Today’s rout in the Japanese financial markets is a taste of the blowback from populist unsustainable inflationist policies.

Moody’s on the Philippines: No Property Bubble, Move along Nothing to see here

noreply@blogger.com (benson_te) — Thu, 23 May 2013 06:28:00 +0000

An official of Moody’s claims that there has been “no property bubble” in the Philippines.Moving along nothing to see here.

The Businessworld writes,

Real estate has again become a hot-button topic after banks saw their exposure to the industry breach regulatory limits in 2012. At P821.7 billion and comprising 20.9% of their total loan portfolio, the amount exceeded the BSP-mandated 20% cap.

The breach, though, was due to a new definition of "exposure." Banks were required to report not just real estate loans but also investments in debt and equity securities that finance real estate activities. These activities range from the acquisition, construction and development of properties, as well as buying and selling, rental and management.

Banks also had include loans for socialized and low-cost housing developments, which were previously exempted from the reportorial requirements.

Mr. Tremblay said the figure was no cause for alarm, noting: "The new definition of ‘exposure’ includes loans to low-cost and socialized housing and these segments tend to be less susceptible to speculation."

The BSP is mulling raising the 20% cap to accommodate the new definition as well as property market growth since 1997, when the limit was first introduced.

"Prospectively, we are not too fixated on any specific numerical cap. There is no magic number that can determine the point beyond which real estate exposure becomes a credit concern," Mr. Tremblay said.

The focus, instead, should be on factors such as demand and supply, underwriting standards, loan-to-value ratios and the leverage of households and firms. These can more accurately show whether the appreciation of prices and borrowers’ behavior is driven by fundamentals or speculation, he pointed out.

"So far, trends in these areas have remained within reasonable limits," Mr. Tremblay claimed. -

The Moody’s expert says the market should focus on demand and supply. Totally agreed.

But if domestic demand has been growing at anywhere at 6-9%, part of which has been financed by debt, and that the supply side has been growing at the rate of about 25% or more bolstered mainly by credit, then are these not signs of burgeoning imbalances? Particularly the ballooning variance between demand, on one side, and on the other, the growth of credit, as well as, the supply side, are not signs of bubbles?

And when such exemplary growth in credit and the supply side is being clustered into popular sectors (real estate, shopping malls, casino, BPO vertical offices), these do not account for as signs of asset bubbles?

Where then is economics in the above article which the Moody’s expert supposedly preaches?

One does not establish the presence or absence of a bubble by reading only statistics and by proclaiming immense faith on authorities for managing them.

Statistics are historical data. They don’t tell much about the future.

While governments have been pursuing activist policies, this does not ensure the sustainability of current trends for the simple reason that their actions merely signifies as "extend and pretend" or "kick the can down the road". All such actions will have serious ramifications. Japan's much ballyhooed Abenomics has as of this writing triggered riots in the Japanese bond markets. If the riots escalate then we might soon see a debt crisis in Japan that will have a domino effect around the world. Does the Moody's see this?

It’s the same reason why mainstream economists failed to see the bubble which culminated with the Lehman bankruptcy in 2008 from which UK’s Queen Elizabeth censured them. In reality most of them were cheerleading the bubble until the bubble boomeranged on their faces.

Moody’s has also not failed to see the US bubble, but even played an important part in the lowering of credit standard by becoming stamp pads for issuers of structured securities.

Yet what Moody’s ignore, is the most critical factor: the trajectory of credit growth both from the supply and demand side, not limited to real estate but to other sectors associated with them.

Importantly what needs to be established are the incentives that will drive such trajectory.

When the Philippine government promotes zero bound rates to induce “domestic demand” and at the same time reduce SDA rates purportedly for “banks to withdraw some of their funds parked in the BSP, thereby increasing money circulating in the economy” , these policies don’t incentivize or promote debt a build-up?

And what’s the purpose of credit rating upgrades?

Investopedia on Credit ratings:

Credit is important since individuals and corporations with poor credit will have difficulty finding financing, and will most likely have to pay more due to the risk of default.

So upgrades extrapolates to an ease of finding credit finance. In short, it is a reward for borrowers or an inducement to borrow. So current upgrades doesn’t provide incentives to further fuel a bubble through more debt?

This is basic economic logic which seem to operate in a vacuum.

Apparently in the eyes and mind of the mainstream, "economics" is a convenient word used to disguise pseudo expertise from the truth and to pander to a politically brainwashed crowd who has been mesmerized by the four most dangerous words of investing, “this time is different”.

Yet unfortunately such mentality is in itself a sign of the manic phase of a bubble cycle in motion.

Caveat emptor.

US Government Admits: Drone Warfare Killed Innocent Americans

noreply@blogger.com (benson_te) — Thu, 23 May 2013 03:09:00 +0000

Imperial US foreign policies coursed through drone warfare has killed even their own citizens

From the New York Times: (hat tip Zero Hedge)

In a letter to Congressional leaders obtained by The New York Times, Attorney General Eric H. Holder Jr. disclosed that the administration had deliberately killed Anwar al-Awlaki, a radical Muslim cleric who was killed in a drone strike in September 2011 in Yemen.

The American responsibility for Mr. Awlaki’s death has been widely reported, but the administration had until now refused to confirm or deny it.

The letter also said that the United States had killed three other Americans: Samir Khan, who was killed in the same strike; Mr. Awlaki’s son Abdulrahman al-Awlaki, who was also killed in Yemen; and Jude Mohammed, who was killed in a strike in Pakistan.

“These individuals were not specifically targeted by the United States,” Mr. Holder wrote.

Are these more signs of things to come? Will drones be used against the US citizens in their homeland in the name of public safety?

Cognitive Dissonance and the US Stock Markets

noreply@blogger.com (benson_te) — Thu, 23 May 2013 02:48:00 +0000

Media, politicians and the US stock market operates in a cognitive dissonance. Cognitive dissonance is the confusion arising from the state of holding (Wikipedia.org) “two or more conflicting cognitions: ideas, beliefs, values or emotional reactions”

First the record run in US stocks has been been attributed to “growing confidence in the U.S. recovery” Good news is read as good for stocks, that's as of the other day.

Then today, falling stocks have been imputed to concerns over a pushback on stimulus; “will scale back its stimulus efforts if the labor market continues to improve”.

Here good news is seen as bad news.

From the above account, one wonders whether the “growing” economy is really good or bad for stocks? Or whether “growth” has merely served as a cosmetic for the deepening addictions by the markets on the FED's steroids?

More rhetorical conflict of rhetoric from Media, Wall Street, and the US government;

On the one hand, the economy has been exhibiting strength for some of the FED officials to propose tapering of stimulus

A number said they were willing to taper bond buying as early as the next meeting on June 18-19 if economic reports show “evidence of sufficiently strong and sustained growth,” according to the record of the April 30-May 1 gathering released today in Washington.

“Most observed that the outlook for the labor market had shown progress” since the-bond buying program began in September, according to the minutes. “But many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate.”

On the other hand, Ben Bernanke contradicts the above by stating that the economy doesn’t seem to be strong enough for premature withdrawal of stimulus

Federal Reserve Chairman Ben S. Bernanke defended the central bank’s record stimulus program under questioning from lawmakers, telling them that ending it prematurely would endanger a recovery hampered by high unemployment and government spending cuts.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony to the Joint Economic Committee of Congress in Washington.

From Mr. Bernanke’s point of view, “premature tightening of monetary policy could lead interest rates to rise” implies the exposing of the risks of the highly leverage markets and economy. And that such tightening would extrapolate to a bubble bust or in economic gobbledygook “the risk of slowing or ending the economic recovery and causing inflation to fall further”

So essentially, people at the Fed have been talking at different wavelengths. Bernanke's discourse has been premised on the entrenched bubble conditions, whereas other Fed officials have used statistics to generate economic forecasts (or reading history as the future).

Thus Fed officials seem as clueless as to the real direction of the economy or of the markets. Or are they?

And a bollixed FED has been used by the stock markets as a reason to retrace. From intraday gains, US stocks went from green into the red yesterday (stockcharts.com)

Record setting US stocks has been on fire rising for 19 straight sessions before today’s correction and whose winning streak was cut short by cognitive dissonance.

Why is this important? Because, aside from direct and indirect interventions, the state of bewilderment of the causal process of the current environment by the media and political agents has contributed immensely to the skewing of price signals and to the accumulation of imbalances in the system. This has also been used to sabotage gold prices.

Well, Philip Coggan of the Economist Buttonwood fame points to studies reinforcing the “parallel universe” or the growing disconnect between stocks and the real economy. (bold mine)

The annualised growth rate of the US economy in the first quarter was 2.5 per cent; the annual gain in earnings per share was 5.2%; the annualised gain in the market was 46%. Of course, as has been pointed out by the assiduous Marsh, Dimson and Staunton, or by Jay Ritter, there is no clear statistical link between GDP growth and equity returns at all.

The mainstream has now been recognizing this.

And as I have been pointing out this is not your daddy or your granddaddy's stock markets.

And more on why the current environment or the parallel universe is unsustainable, again from the Buttonwood… (bold mine)

The hope is that higher share prices can eventually produce a self-fulfilling cycle via a wealth effect (and on this note, the University of Michigan survey last week showed consumer confidence at a six-year high) or indeed on business investment. Mr Makin notes that real household net worth is up by about $4 trillion over the last year, helped by houses as well as stocks. He estimates the wealth effect at about 4% over a year; thus the boost to consumer spending was $160 billion, or 1% of GDP. This may indeed explain why US consumer have shaken off the effect of the rise in payroll taxes this year.

But the offset of this wealth effect is that the household savings rate fell to 2.6% in the first quarter, down from 5.1% in 2010. As Mr Makin points out, this is ominously similar to the pre-2007 pattern of high consumption based on the hope that asset prices would stay high. The potential long-term problem here is that asset prices tend to revert to the mean; people may be saving too little for their retirement on the view that markets will do all the work. As in 2007 and 2008, they may get a nasty shock later on. One could make quite a bearish case for US equities in the long run, on the grounds that share price valuations (as measured by the Shiller p/e) are higher than average and profits are at a post-1947 high as a proportion of GDP.

The lesson is whatever statistical growth seen from today is mostly a reflection of credit driven elevated prices of financial assets rather from real economic growth. The same holds true for the Philippines.

The mirage of statistical growth.

Hence Ben Bernanke realizes that any pullback of steroids would expose on this sham that would undermine the banking sector’s balance sheets.

Also an ‘exit’ would also mean the pulling of the proverbial rag underneath the FED’s monetization of US debts which hardly anyone talks about.

Bottom line: The protection of the banking sector and the Fed’s financing of US government debt have been the main pillars that undergirds the FED’s credit easing policies. That’s why such “exit” or “withdrawal” blarney are what I call as poker bluff. The Fed cannot afford it.

IN withholding the truth, the Fed’s communication’s strategy seems as the guileful employment of cognitive dissonance in order to confuse the public.

As English novelist Eric Arthur Blair popularly known for his pen name George Orwell wrote in Politics and the English Language (italics original)

Political language…is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. One cannot change this all in a moment, but one can at least change one's own habits, and from time to time one can even, if one jeers loudly enough, send some worn-out and useless phrase — some jackboot, Achilles’ heel, hotbed, melting pot, acid test, veritable inferno, or other lump of verbal refuse — into the dustbin where it belongs.

Quote of the Day: Libertarianism: Putting Justice, Truth, Goodness and Beauty into Reality

noreply@blogger.com (benson_te) — Wed, 22 May 2013 07:04:00 +0000

Libertarianism is not merely the intellectual contemplation of a wonderful, true and just political philosophy, it's not just the esthetic contemplation of a beautiful ideal, the ideal of a world without organized aggression, a world of harmony, of freedom, of prosperity, of mutual cooperation through voluntary activities in free markets. It is, of course, all of that. Because we become Libertarians in the first place because we fall in love, so to speak, with the goodness, the truth and the beauty of Libertarianism. But we Libertarians, it seems to me, are not content with contemplating justice, with contemplating truth, goodness and beauty. We're not playing intellectual games. We mean to change the world. We want to put this thing into reality.

This snippet from a talk given by "Mr. Libertarian", Dr. Murray N. Rothbard at the First World Libertarian convention in 1982

I posted earlier the video "The Six stages of the Libertarian movement" here.

Pls read the rest of the transcript at the lewrockwell.com

War on Coins: European Commission Proposes 1, 2 cent phase out as German Official Balks

noreply@blogger.com (benson_te) — Wed, 22 May 2013 05:41:00 +0000

Euro Commission officials has proposed to phase out small denomination coins. Such proposals follows other nations like Canada, Netherland and Finland whom has similarly embarked on extinguishing coins from circulation.

From Reuters:

Saving pocket change may not end the euro zone crisis, but the European Commission hopes that scrapping the smallest coins could help penny-pinching governments cut costs.

The European Commission outlined proposals this week for the 17 euro zone countries to scrap their 1 and 2 cent coins, leaving 5-cent pieces as the smallest in circulation.

The Commission says the cost of making the coins has exceeded their face value for the past 11 years, effectively costing member states 1.4 billion euros ($1.8 billion).

More than 45 billion of the 1 and 2 cent coins have been minted since the euro entered circulation in 2002, but many are now buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers.

While scrapping them all together may appear to make sense, some consumers worry that rounding prices up to the nearest 5 cents will prove inflationary. On the other hand, rounding prices down to the nearest 5 cents might be beneficial.

Some observations:

European officials admit that these coins have greater value than the designated official face value.

Here is the content of the euro coins, according to the Wikipedia.org

The euro 1 and 2 coins are two-toned. The "gold" is an alloy, 75% copper, 20% zinc and 5% nickel. The "silver" is cupronickel, 75% copper, 25% nickel. The 10, 20 and 50-cent coins are a proprietary alloy known as "Nordic gold", consisting of 89% copper, 5% aluminium, 5% zinc and 1% tin. The 1, 2 and 5-cent coins are copper-coated steel fourrées. The copper alloys make the coinage antimicrobial.

So for the EU bureaucracy to cut further losses, it has been alleged, coin production need to be halted.

Next, EU officials imply that the public has been unintentionally hoarding coins: “buried behind sofas, lost in back pockets or left on the street rather than making their way to cash registers”.

Authorities acknowledge that such coins have higher value, but they insinuate that their constituents, the average citizens, don’t see or realize this. So the public is completely ignorant from real world affairs.

Such is an example where authorities are engaged in what seems as rhetorical sophistry which media imbibes as the gospel of truth.

In reality, such proposal has been all about political subterfuge.

Even if the ECB has been inflating less than her peers, they have been inflating. (charts from Cumber.com)

Yet by holding coins, one’s resources will affected less from the stealth transfer of being wealth conducted through inflationist policies.

In other words, coins provides refuge against policies that facilitate indirect looting of people’s savings, especially during run away inflation.

Recognizing this, the German central bank or Bundesbank president Jens Weidmann in an interview at the Bild.ge indirectly expressed opposition on such proposals…

In the German population, the desire to hold on to the coinage. Personally, I can only agree with that.

This is natural given the trauma from horrors of the Weimar hyperinflation as shown by the coin above in stating that “On 15 November 1923 1 pound of bread cost 80 billion, 1 pound of meat: 900 billion, 1 glass of beer: 52 billion”

Albeit, Mr. Weidmann leaves the decision on reducing the circulation of coins to the EU finance ministers than to central bankers.

Again whether it is cash transactions, gold and other precious metals, crypto-currencies like bitcoins or even government made coins, world governments have been working around the clock to ensure forced access on people’s savings.

An Example of Mania Thinking to Justify the US Stock Market Bubble

noreply@blogger.com (benson_te) — Wed, 22 May 2013 00:57:00 +0000

Look at the so-called “analysis” below from the following Bloomberg article:

A rising dollar may help push U.S. stocks higher by giving international investors more incentive to buy, according to Michael Shaoul, chief executive officer of Marketfield Asset Management.

The CHART OF THE DAY displays the performance of the Standard & Poor’s 500 Index and the Dollar Index since 1994 in the top panel. The correlation between the gauges, based on the most recent 200 weeks of trading, appears in the bottom panel.

March marked the first time since 2005 that the Dollar Index, which IntercontinentalExchange Inc. uses to track the currency’s value against the currencies of six of the largest U.S. trading partners, had a positive correlation with the S&P 500. Since then, the relationship has grown stronger each week.

“Foreign capital flows are starting to be attracted to the U.S. equity market” in a way last seen when the Internet bubble sent stocks surging in the 1990s, Shaoul wrote. The New York-based analyst added that he expects the dollar and share prices to rise together for the next few months.

One doesn’t need to be an “expert” to note of the bandwagon effect from higher financial market prices. This is not just an example of reflexivity—feedback loop between expectations and outcomes, it is an example of survivorship bias (looking only at the winners) and most importantly it is an example of the incentive to yield chase via momentum trade. People simply love to chase winners or the popular. The same applies to politics.

Here foreign capital flows serve merely as fundamental “rationalization” for the pattern and narrative seeking momentum trade behavior.

Look at the provided chart, while there are periods of extended tight positive correlations, there are also prolonged periods of negative correlations. Importantly, there have been whipsaws such as 1996 or 2002. In short, the correlation trade, between the S&P and the US dollar, has hardly been a sure thing.

Given today’s environment, a higher dollar means a bubble or credit fuelled yield chasing process is in progress. The artificial boom becomes a magnet for international speculators. Thus “foreign capital flows”. The same applies to the Philippines or ASEAN.

It also means that the race to devalue everyone’s currency has temporarily been tilted in favor of the US dollar. The marketplace temporarily expects counterparts of the US dollar to relatively devalue more. For instance Japan’s Abenomics may have made the US dollar as interim shock absorber for capital flight.

The strength of the US dollar also means that given today’s financial globalization, political-economic woes, such as the Eurozone, having been aggravated by the prospects of widening bank deposit seizures, has resulted, not only to reaching for yields for the benefit of the US dollar, but again the US dollar as interim refuge for capital from fears of confiscation.

But what this article fails to cite is the economic aspect: does higher prices lead to more demand or less? What if the booms turn into a bust? What if the FED revs up on the $85 billion a month purchases? What if the hibernating bond vigilantes in the US reawaken? What if for some reason or another, financial markets lose confidence on the US dollar? What if there will be a run on fiat money in general or across the world?

Banking on correlation without understanding the causal process signifies a hazardous undertaking.

The above oversimplified justification of buying stocks by using the US dollar correlation is an example of bubble mentality.

Caveat emptor.

First Paper Gold Exchange Casualty? Hong Kong Mercantile Exchange Closes, Settles in Cash

noreply@blogger.com (benson_te) — Tue, 21 May 2013 08:10:00 +0000

Is the closing of the Hong Kong Mercantile Exchange signs of things to come for paper gold exchanges?

From the Hong Kong Mercantile Exchange: (hat tip Goldseek.com)

The Hong Kong Mercantile Exchange (HKMEx) announces today it has decided to voluntarily surrender the authorisation to provide automated trading services (“ATS”) granted by the Securities and Futures Commission (“the SFC”).

With immediate effect, no new orders may be placed and all open positions will be financially settled at the settlement price determined by HKMEx and its designated clearinghouse.

The voluntary surrender decision was made to enable the Exchange to re-align its strategy with the new industry environment since its trading revenues have not been sufficient to support operating expenses and, as a result, its inability to meet the required regulatory financial conditions.

While trading on the Exchange will discontinue, HKMEx as an organisation will continue to operate with its existing staff, and will focus on developing new products including renminbi-denominated precious and base metals contracts that will better meet customer needs. It also intends to re-apply at an appropriate time for an ATS authorization to launch these products with stronger and more effective market maker programs.

“The favourable conditions under which HKMEx was founded have not changed. Global commodity demand continues to shift towards Asia as the region undergoes sustained growth, presenting great opportunities that we will continue to exploit,” said Barry Cheung, Chairman of HKMEx. “Our priorities now are to protect members’ interests by ensuring effective closing of open positions while strengthening our shareholding base and developing new products that play to our distinctive strengths.”

In closing out the open positions, the Exchange has developed a plan in consultation with the SFC to ensure the process is orderly and that investors are well informed of the matter.

Will more default soon (out of supply shortages)? Things are really getting to be a lot interesting.

Contra Media: George Soros hasn’t been Selling Gold, He’s Buying Mines and Redeeming Physical Gold

noreply@blogger.com (benson_te) — Tue, 21 May 2013 07:32:00 +0000

Mainstream media likes to promote the supposed bear market in gold by attributing to actions of celebrity investors like George Soros.

From yesterday’s Bloomberg:

Soros Fund Management LLC lowered its investment in the SPDR Gold Trust, the biggest bullion ETP, by 12 percent to 530,900 shares as of March 31, compared with three months earlier, a Securities and Exchange Commission filing showed May 15.

Paul Craig Roberts, former Assistant Secretary of the US Treasury and former associate editor of the Wall Street Journal, writing at the lewrockwell.com unearths what George Soros’ real position is (bold mine)

You know that gold bear market that the financial press keeps touting? The one George Soros keeps proclaiming? Well, it is not there. The gold bear market is disinformation that is helping elites acquire the gold.

Certainly, Soros himself doesn’t believe it, as the 13-F release issued by the Securities and Exchange Commission on May 15 proves. George Soros has significantly increased his gold holding by purchasing $25.2 million of call options on the GDXJ Junior Gold Miners Index.

In addition the Soros Fund maintains a $32 million stake in individual mines; added 1.1 million shares of GDX (a gold miners ETF) to its holdings which now stand at 2,666,000 shares valued at $70,400,000; has 1,100,000 shares in GDXJ valued at $11,506,000; and 530,000 shares in the GLD gold fund valued at $69,467,000. [values as of May 17]

The 13-F release shows the Soros Fund with $239,200,000 in gold investments. If this is bearish sentiment, what would it take to be bullish?

The misinformation that Soros had sold his gold holdings came from misinterpreting the reason Soros’ holdings in the GLD gold trust declined. Soros did not sell the shares; he redeemed the paper claims for physical gold. Watching the gold ETFs, such as GLD, being looted by banksters, Soros cashed in some of his own paper gold for the real stuff.

The giveaway that Soros is extremely bullish on gold comes not only from his extensive holdings, but also from his $25.2 million call option on junior gold stocks. This is a highly leveraged bet on the weakest gold mines. With high production costs and falling gold price from constant short selling in the paper market, Soros’ bet makes no sense unless he thinks gold is heading up as the short raids concentrate gold in elite possession.

Well isn’t this poop and scoop or the spreading disiformation in order to force prices down and enable unscrupulous practitioners to profit?

Media has been deceptive, while it may be true that Mr. Soros may have reduced ETF holdings, they didn’t say that this was not a result of selling but from paper redemption to physical gold. Mr. Soros has shifted from paper gold and joined the physical real gold markets

And it is important to note that in watching what he does rather than what he says (demonstrated preference), Mr. Soros has been buying up the depressed mining sector both from derivatives (call option) ETFs (GDX) and from direct share ownership.

Media can be so toxic.

Video: Designing Confidence: How 3D Printing Improves on Prosthetic design

noreply@blogger.com (benson_te) — Tue, 21 May 2013 06:58:00 +0000

The following video features the the innovative work of Scott Summit in using 3D Printing and digital scanning technology to greatly improve Prosthetic design. (hat tip Professor Mark Perry)

Thailand’s Credit Bubble: Rising Baht is a Symptom Not the Disease

noreply@blogger.com (benson_te) — Tue, 21 May 2013 06:15:00 +0000

Thai’s former prime minister adores Abenomics. He claims that a rising currency the Thai baht may spark a crisis.

From Nationalmultimedia.com

Former prime minister Thaksin Shinawatra warned yesterday that a lack of cooperation between the central bank and the Finance Ministry in reining in the strengthening baht could lead to a new financial crisis for Thailand.

Thaksin said the current economic indexes were worrying. "I like looking at different indexes and often get alarmed," he said.

"During the crisis, only the paranoid survived," he added, quoting Andrew Grove, former chief executive of computer-chip maker Intel.

The latest message on his Facebook account (www.facebook.com/thaksinofficial) posted yesterday afternoon said that Japan was able to achieve a GDP growth of 3.5 per cent in the first quarter because the Bank of Japan works directly with the Japanese government. He said Thailand's problem was that the Bank of Thailand was independent, and he accused the central bank of refusing to listen to the government.

"They [the Japanese] have a holistic approach to dealing with their economic problems. Their monetary policy and their fiscal policy are united," Thaksin said.

I have previously pointed out that Thailand has been nursing and blowing a bubble. Here is an update

Thailand’s loans to the private sector has spiked by nearly 40% since 2010 chart from tradingeconomics.com. That’s about 17%+ annual growth in the last 2 years + in a economy that has recently grown by an annual rate of 5.3%

Thailand’s debt to gdp in 2011 was at 132%. Current the explosive growth of loans imply that Thailand’s debt to gdp ratio nears or is at the 1997 highs of 166%.

And since banks has accounted for the gist of lending, domestic credit sourced from the banking sector in 2011 was at 150.78. This should be much larger today, perhaps near or at the 1997 levels of 177%

The credit boom in Thailand has led to swelling trade deficits. This implies that the Thais have been spending more than they have been producing, such that the consumption boom has been financed through credit expansion. This also implies reduced productivity as resources are being squandered on yield chasing and rampant speculative activities.

The former Thai PM sees the Japan’s model as a worthy paradigm to emulate. But the Thai government has already been doing an Abenomics but at a modest rate.

The Thai’s government budget has swung from surpluses to deficits over the last few years, which means government spending has increasingly been outpacing revenues.

And given the rate of increase in spending, the Thai government-debt to gdp has marginally risen the recent years. The subdued effect from rising government expenditures has been due to the bloated denominator from credit driven boom

And where does the Thai government get its funding to finance government’s accelerated spending? Well like the private sector, through debt expansion.

Thailand’s external debt has DOUBLED at the close of 2012 relative to 2006.

The following chart hasn’t been updated. But it shows that the short term debt segment of the external debt, in 2010 constituted 54% share, which may be higher today.

This ratio has already topped the 1997 levels. And this also means Thailand’s debt profile makes it highly vulnerable to short term interest spikes.

Slower statistical economic growth have already been whetting the steroid addicted financial markets of another rate cute. This should further aggravate the ongoing credit bubble seen in Thai’s private sector and government.

Like Philippines, policy induced bubbles have led Thailand's stock markets to boom. The SET now fast approaches the 1997 highs.

Bottom line: Former PM Shinawatra has his reasoning backward. The rising baht has not been the disease. Rather the rising baht, like the strong Philippine peso accounts for as symptoms. The disease is that of the manipulated boom financed by a credit bubble, fired up by zero bound rates (as shown by explosive growth in private sector loans) and of the intensifying government outlays (which is being funded by ballooning) external debt.

So if Thailand’s government does an Abenomics, a surge in short term interest rates could trigger a debt crisis

Thailand’s credit bubble seems as in a very much advanced state than the Philippines. And this could become the catalyst for a regional contagion.

Déjà vu 1997?

Massive Short Covering Prompts for Gold’s Best Day in 11 Months

noreply@blogger.com (benson_te) — Tue, 21 May 2013 04:03:00 +0000

The precious metals markets have been experiencing extreme volatility. But the pendulum seems to have suddenly shifted towards the bulls

Here is the Reuters: (bold mine)

Gold and silver prices gained nearly 3 percent on Monday after a roller-coaster session that opened with a gut-wrenching dive in silver to its lowest in 2-1/2 years before an abrupt midday turnaround.

After trading lower through most of the day, gold suddenly lurched more than $10 an ounce higher around noon U.S. time, with traders citing a wave of pent-up short-covering after seven consecutive days of losses. Also, COMEX silver futures had plunged more than 9 percent after a big sell order at the open, triggering technical buy signals, they said.

Yet this is one of the very scanty reports that covered gold’s fantastic one-day bounce.

It looks like most media, whom has been preaching of "the end of the gold bubble" meme, went into a blackout with gold’s single day comeback.

I know, this may be a short-term dead cat's bounce.

The chart from the Zero Hedge reveals of the massive intraday swing from a test of the mid-April low to the 3% gain which accounted for as gold’s best day in 11 months

It is interesting to note that gold’s bounce comes amidst a RECORD pile up of Wall Street shorts;

Here is the Bloomberg: (bold mine)

The funds and other large speculators held 74,432 so-called short contracts on May 14, U.S. Commodity Futures Trading Commission data show. That’s the highest since the data begins in June 2006 and compares with 67,374 a week earlier. The net-long position dropped 20 percent to 39,216 futures and options, the lowest since July 2007. Net-bullish wagers across 18 U.S.- traded raw materials rose 1.1 percent to 588,482, led by gains in hogs, corn and cotton.

And this also comes amidst the escalating divergence between the supposedly larger physical markets, but which Wall Street has overpowered through the use of massive leveraged derivatives

Abenomics Fails to Spur Business Spending

noreply@blogger.com (benson_te) — Tue, 21 May 2013 03:03:00 +0000

I recently pointed out that the 3.5% boost in Japan’s statistical GDP has not reflected on real economic growth for the basic reason that monetary policy induced price distortions impede economic calculation and promotes discoordination. And that such growth has merely represented the frontloading of spending actions in view of forthcoming higher taxes.

We have anecdotal proof on this:

From the Bloomberg’s today’s Abe’s Resurgent Japan Hurt by Lack of Business Spending (bold mine)

As Japan’s cherry trees bloomed and the stock market soared, Kohetsu Watanabe flew to a blossom-viewing party in Tokyo hosted by Prime Minister Shinzo Abe to tell the premier personally how bad things really are.

When the head of machine-parts maker Daikyo Seiki Co. shook hands with Abe at the 12,000-guest event in Shinjuku Gyoen park, he says he begged the premier to help small- and medium-sized companies that make up 70 percent of Japan’s industry.

“Stocks and the yen may have come back, but the state of the real economy is very different,” said Watanabe, 49, who has no plans to raise wages for his 17 employees and hasn’t paid a bonus since 2008. “It’s impossible for me to be optimistic.”

His company in Akita, northern Japan, highlights the hurdle Abe faces in his quest to end 15 years of deflation and reinstate Japan as a pillar of the global economy. The first two “arrows” of so-called Abenomics, fiscal and monetary stimulus, have caused shares to rise and the yen to slump. While that helps exporters, it means more expensive imported materials and energy for Watanabe. With sales taxes set to rise in April, Abe’s third arrow -- restructuring rules to help businesses -- probably will take too long or be too watered down to prevent a drop in domestic demand next year.

What’s Japan’s real structural problem? From the same article:

With executives such as Watanabe waiting for earnings to improve before raising salaries, that pain may last beyond next year as the government faces opposition to dismantling decades-old policies, such as labor laws that make it difficult to fire workers.

How will such distortive labor regulations be eased by Abenomics?

In his May 17 speech, Abe said he wants to boost private investment to 70 trillion yen ($683 billion) a year -- the level before the 2008 financial crisis -- through deregulation, taxes, spending and equipment-leasing deals. He aims to triple infrastructure exports to about 30 trillion yen by 2020…

Yet the bias for the politicization of the marketplace:

The measures announced so far don’t go far enough, according to Izumi Devalier, an economist at HSBC Holdings Plc in Hong Kong, who says major restructuring is needed in agriculture, health care and labor laws…

“The Cabinet appears to be shying away from deregulation, opting instead to use subsidies and usual government-support programs,” Devalier wrote in a May 14 research note.

Just think of it; how will business investments and domestic demand improve when increasing taxes means a diversion of resources from the private sector to the government?

Whatever money government spends is money that the private sector won’t be spending. These are called opportunity costs and the crowding out effect from government interventions.

Yet government spending will be financed by more debt in the light of continuing weak business environment burdened by taxes and constrained by price instability. So Abenomics essentially will compound on her precarious nearly 220% debt to gdp.

Yet the above account shows how the Japanese government refuses to deal with the stringent labor laws that has choked the economy.

Japan's rigid immigration laws represents as another vitally important structural hindrance which politicians refrain from reforms.

This shows that in politics, there is no such thing as economic logic, thus the tendency to deal with superficialities or treating the symptom rather than the disease.

Well of course, the Abenomics path of “subsidies and usual government-support programs” has been tried and tested since the Japanese bubble imploded in 1990s.

Let me quote in length Douglas French’s narrative of the doing the same thing over and over again yet expecting different results:

The Japanese government didn’t just leave matters to the monetary authorities. Between 1992-1995, it tried six stimulus plans totaling 65.5 trillion yen and even cut tax rates in 1994. It tried cutting taxes again in 1998, but government spending was never cut.

In 1998, another stimulus package of 16.7 trillion yen was rolled out, nearly half of which was for public works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year, an 18 trillion yen stimulus was tried, and in October 2000, another stimulus of 11 trillion yen was announced.

During the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession.

In spring 2001, the BOJ switched to a policy of quantitative easing — targeting the growth of the money supply, instead of nominal interest rates — in order to engineer a rebound in demand growth.

The BOJ’s quantitative easing and large increase in liquidity stopped the fall in land prices by 2003. Japan’s central bank held interest rates at zero until early 2007, when it boosted its discount rate back to 0.5% in two steps by midyear. But the BOJ quickly reverted back to its zero interest rate policy.

In August 2008, the Japanese government unveiled an 11.5 trillion yen stimulus. The package, which included 1.8 trillion yen in new spending and nearly 10 trillion yen in government loans and credit guarantees, was in response to news that the Japanese economy the previous month suffered its biggest contraction in seven years and inflation had topped 2% for the first time in a decade.

In December 2009, Reuters reported, “The Bank of Japan reinforced its commitment to maintain very low interest rates on Friday and set the scene for a further easing of monetary policy to fight deflation. The bank said that it would not tolerate zero inflation or falling prices.”

In a paper for the International Monetary Fund entitled Bank of Japan’s Monetary Easing Measures: Are They Powerful and Comprehensive?, W. Raphael Lam wrote that the BOJ had “expanded its tool kit through a series of monetary easing measures since early 2009.” The BOJ instituted new asset purchase programs allowing the central bank to purchase corporate bonds, commercial paper, exchange-traded funds (ETFs), and real estate investment trusts (REITs).

According to Lam’s work, the BOJ bought 134.8 trillion yen worth of government and corporate paper between December 2008 and August 2011. Lam described the impact of these purchases as “broad-based and comprehensive,” but it failed to impact “inflation expectations.”

For more than two decades, the Japanese central bank and government have emptied the Keynesian tool chest looking for anything that would slay the deflation dragon. Reading the hysterics of the financial press and Japanese central bankers, one would think prices are plunging. Or that borrowers cannot repay loans and the economy is not just at a standstill, but in a tailspin. Tokyo must be one big soup line.

At the end of the day, all the hero worship on Abenomics or Japan inflationism as elixir will turn out badly for the simple reason that, as I recently wrote:

Abenomics operates in an incorrigible self-contradiction: Abenomics has been designed to produce substantial price inflation but expects interest rates at permanently zero bound. Such two variables are like polar opposites. Thus expectations for their harmonious combination are founded on whims rather from economic reality.

Abenomics will advance on Japan’s coming debt crisis.

Video: Peter Schiff: This time it is different, it will be a lot worse

noreply@blogger.com (benson_te) — Mon, 20 May 2013 06:04:00 +0000

This time is different, it will be a lot worse, says Peter Schiff speaking at the 2013 Las Vegas MoneyShow.

Mr Schiff's talk covers a wide range of interrelated topics from today's deja vu of 2006 in terms of steroid induced market euphoria, the bond market ponzi scheme, the Fed exit's bluff, manipulation of price inflation and growth statistics, runaway inflation and hyperinflation and the gold bubble (a bubble which ironically hardly anybody from Wall Street owns). (hat tip Lewrockwell.com)

Graphics: Here Comes Super-Abenomics!

noreply@blogger.com (benson_te) — Mon, 20 May 2013 04:11:00 +0000

From this week’s cover of the Economist magazine.

The worship of inflationists and the religion of inflationism has reached new heights. Yes we are at the pinnacle of the central banking-inflationism bubble.

As the great Ludwig von Mises once wrote, “The favor of the masses and of the writers and politicians eager for applause goes to inflation.”

Yet all such optimism looks nothing new. The following article from the New York Times in March 1999 showcases an almost similar level of optimism where interventionism has been seen as an elixir to Japan’s economy.

Fourteen years after, yet still the hope for political magic to work.

The Flaws of BSP’s Real Estate Monitoring and Banking Stress Tests

noreply@blogger.com (benson_te) — Sun, 19 May 2013 17:44:00 +0000

Rushing in defence over growing concerns of the risks of asset bubbles, the Philippine central bank, the Bangko Sentral ng Pilipinas conducted a real estate exposure test monitoring which included a partial banking stress test[1].

In the report the BSP has not explicitly issued a confirmation or a denial of the risks of a domestic bubble. But they placed into the context the following

-The Philippines’s total banking exposure on real estate was at Php 821.7 billion as of December 2012.

-The BSP continues to monitor the 20 percent cap on RELs since 1997 where current report includes “loans by developers of socialized and low-cost housing, loans to individuals, loans supported by non-risk collaterals or Home Guarantee Corporation guarantee as well as exposures by bank trust departments and thrift banks.”

-The thrust to examine the banking sector’s exposure in real estate “is in line with the BSP’s pursuit of financial stability”

-The BSP hasn’t shown any signs of worries, due to stable non-performing RELs ratio which was “reported at 3.7 percent as of end-December 2012”

-And the BSP seems confident there is enough capital to withstand any potential shocks “with capital adequacy ratio of tested U/KBs and TBs will stand at 15.77 percent despite a 50 percent simulated default on residential real estate loans.”

First of all, the BSP does not mention that Real Estate Loans (REL) at 821.7 billion pesos and with a total loan portfolio TLP (net of interbank lending) of 3,938.9 billion pesos, real estate loans as a share of TLP would now account for 20.86%.

And so if my interpretation of their data is accurate then the banking sector has essentially hit its speed limits on issuing loans to the property sector. Will the BSP put on the brake and reverse the boom? How?

Next, it isn’t clear what the BSP means by “financial stability”? If they are referring to controlling price inflation my question is—are there no opportunity costs in in implementing “financial stability” measures? Or why should moderating price inflation come at the costs of blowing asset bubbles?

Let me cite the former chief of Monetary and Economic Department at the Bank of International Settlement’s William R. White in his 2006 paper who argued against price stability policies (bold mine)[2]

…price stability is indeed desirable for a whole host of reasons. At the same time, it will also be contended that achieving near-term price stability might sometimes not be sufficient to avoid serious macroeconomic downturns in the medium term. Moreover, recognising that all deflations are not alike, the active use of monetary policy to avoid the threat of deflation could even have longer term costs that might be higher than the presumed benefits. The core of the problem is that persistently easy monetary conditions can lead to the cumulative build-up over time of significant deviations from historical norms – whether in terms of debt levels, saving ratios, asset prices or other indicators of “imbalances”.

Also Non Performing Loans (NPLs) are coincident if not lagging indicators. NPLs are low because the current boom continues. NPLs become reliable indicators, when asset quality deteriorates or when the credit boom is in the process of reversing itself into a bust. Again they are coincident if not lagging indicators.

In addition, the BSP appears to have isolated its bank stress test by limiting “simulated default on residential real estate loans”. Why? Doesn’t the BSP know that economies are complex and vastly interdependent such that economies do not operate on isolation as the BSP model presumes?

A bursting bubble will ripple through not only through the residential real estate segment but would also impact commercial property sectors (office, shopping malls, casinos etc...) or firms that are highly leveraged.

More importantly, once the real estate sector gets slammed by the entwined factors of financial losses and deleveraging, such will likewise impact all sectors that have exposure on them, and so with the banks.

And affected secondary sectors will also hit firms from different industries connected to them, and so forth.

Thus the complex latticework of commercial networks means that the feedback mechanisms from the bubble busts will have a domino effect and thus spawn a crisis.

So models will not be able to capture the contagion effects from a real-estate-stock market bust for the simple reason that models tend to mathematically oversimplify what truly is a complex reality.

The fundamental flaw with BSP’s implied defence of the risks of asset bubbles has been to interpret statistics as economics.

The above diagram represents the compounded average of 15%. A compounded average of 15% means a doubling of anything in 5 years. This applies to leveraging or economic imbalances.

Let us assume that a doubling of leveraging or imbalances will put an economy to a state of vulnerability to financial risks. It would not be helpful to say that, if we are at the T-3 stage, where statistics show only 152.09, to claim that there is no risk because of the current state. While such statement may be true, it essentially denies the imminence based on the trajectory.

In other words, the shifting of the burden of risk analysis from the rate of growth to reading today’s numbers would represent as misleading analysis and a denial.

The same logic applies to a pre-debt crisis build up as shown by history.

In the chronicle of about 250 crisis in 8 centuries, Harvard’s Carmen Reinhart and Kenneth Rogoff notes of the same pattern[3] (bold mine)

domestic debt is not static around default episodes. In fact, domestic debt often shows the same frenzied increases in the run-up to external default as foreign borrowing does. The pattern is illustrated in Figure 5, which depicts debt accumulation during the five years up to and including external default across all the episodes in our sample. Presumably, the comovement of domestic and foreign debt is produced by the same procyclical behavior of fiscal policy documented by previous researchers. As shown repeatedly over time, emerging market governments are prone to treating favorable shocks as permanent, fueling a spree in government spending and borrowing that ends in tears.

Again it is the trajectory that matters.

In short, it is the presence or absence of the factors that drives the incentives for these frenzied desire to accumulate debt that needs to be identified and curtailed.

Unfortunately since the genesis of such incentives have been political which have been effected through social policies, and from which the untoward impact from such polices are invisible and incomprehensible to the public, such policies will hardly be stopped until a blowback from the marketplace occurs.

And as for the state of euphoria, where governments think that they have reached a state of presumed perfection, the passing of the bank stress test in Cyprus in 2011 should serve as a fantastic example:

From the Cyprus Mail[4],

In Nicosia the Finance Ministry issued a statement saying: “The measures which the banks are taking or planning to take will further increase solvency.”

The statement also referred to a “removed possibility” of having to support the banks, stating the government was ready to “immediately take any necessary measures to maintain financial stability.”

BoC “successfully passed the test” because of its strong capital base, fluidity and satisfactory profitability, Bank of Cyprus’ Chief Executive Officer, Andreas Eliades.

Strong capital base, fluidity, increase solvency and satisfactory profitability, all turned on its head, March this year. The rest is history.

I know, the Philippines is not Cyprus. But the important lesson from the Cyprus episode is one of overconfidence that leads to complacency that further enhances systemic buildup of risks.

Remember bubbles are manifestations of the reflexive feedback loop between expectations as influenced by prices, and actions as influenced by expectations, which are enabled and facilitated by debt and incentivized by policies.

Overconfidence and complacency fosters systemic instability which is hardly “the pursuit of financial stability”

The BSP’s Wealth Transfer

These two charts embody the structural deficiencies of the Philippine political economy.

The BSP estimates that only 21.5% of households have access to the formal banking sector[5].

Yet domestic credit provided by the banking sector accounts for 51.54% of the GDP in 2011[6]. I would guess that the latter figure would be substantially higher today, given the credit boom mostly channelled through the banking sector.

Yet what these two diagrams say is that statistical economic growth has been immensely tilted towards those less than 21.5 households who have access and or have used credit from the banking system.

Not all depositors like me have used credit from the banking sector for whatever purpose. Yes I have credit cards but I which I use infrequently.

The BSP confirms this; they estimate that only 4% households have credit cards.

The lopsided exposure to the banking industry has been likewise reflected on the stock market.

As of 2011, according to Bloomberg/Matthews Asia[7] the wealthy elites control 83% of the market capitalization of the Philippine Stock Exchange

And considering the low penetration levels to the banking system and to the stock market, it would be even more conceivable that the general public hardly has any access to the more complex bond markets.

Again capital markets and the banking system have been greatly biased to the formal economy and to the oligarchs and plutocrats who control them.

Though we know that this has been an inherited problem, there has been little attempt by the powers-that-be to distribute them through liberalization ever since.

The procrastination by the PSE to hook up with the ASEAN trading link or the integration of ASEAN bourses[8] is an example. Philippine political and economic elites seem apprehensive over the prospects of losing their privileges with an ASEAN interconnection. The same applies with the lack of commodity markets where such markets would undermine the privileges of these plutocrats.

The much ballyhooed policy reforms has been more of the same. For example, government spending based on public-private partnerships, would only mean that the politically connected will be rewarded with such economic opportunities or concessions.

Yet foisting a zero bound rates in order to supposedly boost domestic demand doesn’t really help the real economy, for the simple reason that the informal economy has little direct access to the formal sector. And this will not change unless the government deregulates or liberalizes.

On the contrary credit easing policies has only boosted the wealth of the politically privileged elite.

As to quote anew the Atlantic[9]:

In 2012, Forbes Asia announced that the collective wealth of the 40 richest Filipino families grew $13 billion during the 2010-2011 year, to $47.4 billion--an increase of 37.9 percent. Filipino economist Cielito Habito calculated that the increased wealth of those families was equivalent in value to a staggering 76.5 percent of the country's overall increase in GDP at the time.

In short, BSP policies represent transfers of resources from the real economy to the political class (via bigger government spending and bigger bureaucracy) and politically connected economic elites.

Thus the manipulated boom, which has been peddled by media and bought for by the gullible public, has been used as license via populist mandate to extend on such privileges.

BSP’s Underbelly: The Philippines’ Shadow Banks

Now going back to the direction of BSP policies.

Promoting “domestic demand” through expanded access of credit has been the purported reason for zero bound rates and the lowering of interest rates of the SDAs[10].

Combine these with the recent credit rating upgrades from major international credit agencies, all these means subsidizing or rewarding debt. Thus the natural outgrowth of accelerating debt.

So the BSP’s direction has been to promote debt. But on the other hand they claim that they would regulate or control it. So the BSP essentially operates in a cognitive dissonance, holding two conflicting ideas as policies. This is a wonderful example of the idiom “the left hand doesn’t know what the right hand is doing”: a self-contradiction

Now that the real estate sector has reached its limits as noted above, the question is will the BSP act?

Even if the BSP does, I am quite sure that many market participants would resort to regulatory arbitrage to circumvent them.

They may shift the use of loans even if they are classified as non-real estate into real estate or into the stock market, such as the fateful Bangladesh stock market crash in 2011[11]. Banks may use off balance sheets. Others may resort to bribery.

Of course, given the huge domestic informal economy, the most likely avenue for regulatory arbitrage is to use the nexus between the formal and the informal economy: the shadow banking system.

The BSP believes that they have the banking sector within their palms, but the World Bank says otherwise

Shadow banking system in Philippines and Thailand accounts for more than one-third of total financial system assets[12]. One would note in the right chart that the Philippine shadow banking system has seen an intensifying rate of growth which has polevaulted since 2009 and has nearly surpassed Thailand’s level.

Aside from common informal microfinancing[13] as 5-6 lending, “paluwagan” or pooled money, “hulugan” instalment credit, much of the growth in the shadow banking system has reportedly been in the real estate sector, particularly the in-house financing from developers[14].

The BSP claims that it would investigate[15] these even if they hardly control the formal system.

The shadow banking system has become a worldwide phenomenon and has grown to as high as $67 trillion in 2011 according to the CNBC[16] or nearly 83% of the $80 trillion world economy. The risks of the shadow banking sector doesn’t intuitively or automatically emerge out of “lack of regulation”, rather, the shadow banking industry has been largely a product of overregulation via regulatory arbitrage. Where an economic or financial system has been hobbled by politics, risks becomes centralized and thus systemic.

Bottom line: Loans to the real estate sector have significantly been more than the caps set by the BSP. Easy money policies have apparently filtered into the informal sector. This means systemic leverage has been far more than what the BSP oversees and supervises. Lastly the BSP hardly has solid control over the formal sector. The same is amplified with the informal or shadow banking system.

Like almost every central bankers today, BSP policies supposedly meant to promote “domestic demand” will be pushed to the limits, despite the rhetoric. And this will further fuel the mania phase in both the stock market and the property sector.

[1] Bangko Sentral ng Pilipinas BSP Releases Results of Expanded Real Estate Exposure Monitoring, May 10, 2013

[2] William R. White Is price stability enough? Bank of International Settlement April 2006

[3] Carmen M. Reinhart and Kenneth S. Rogoff The Forgotten History of Domestic Debt September 21, 2010 Harvard University

[4] Cyprus Mail Cyprus banks pass EU stress test, July 16, 2011

[5] Bangko Sentral ng Pilipinas 2012 Annual Report Volume 1

[6] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN PHILIPPINES

[7] Kenneth Lowe Kicking the Tires Asian Insight Matthews Asia 2013

[8] See Phisix 7,200: Up, up and away! The Illusions of Comfort May 6, 2013

[9] See The Atlantic on Philippine Economic Boom: Looks Great on Paper May 8, 2013

[10] See Phisix and the BSP: This Time is Different? March 17, 2013

[11] See Bangladesh Stock Market Crash: Evidence of Inflation Driven Markets January 11, 2011

[12] Swati Ghosh, Ines Gonzalez del Mazo, and İnci Ötker-Robe Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets? World Bank September 2012

[13] See Phisix: In The Eyes of Asia’s Bond Market, Deflation Phantom, Hedge Against Inflation June 29, 2008

[14] Businessworld Research The pros and cons of shadow banking February 8, 2013

[15] Inquirer.net BSP to probe ‘shadow banking’ allegations October 1, 2012

[16] CNBC.com 'Shadow Banking' Still Thrives, System Hits $67 Trillion November 18, 2012

Phisix in the Shadow of Greed and Fear

noreply@blogger.com (benson_te) — Sun, 19 May 2013 17:37:00 +0000

Strange times are these in which we live when old and young are taught in falsehood's school. And the one man who dares to tell the truth is called at once a lunatic and fool. -- Plato

Up, up and away!

The Philippine Phisix only posted a marginal .24% gain this week. But on a weekly basis the local benchmark soared to an all-time high.

Such marginal gain reflects on this week’s sharp volatility, specifically the difference between the spike during the two post-election trading sessions and the subsequent profit taking at the close of the week which ended up with a residual net gain.

Year-to-date the Phisix has returned a fantastic 25.24% as of Friday’s close. We are fast closing in on the 32.95% annual return of 2012. Yet there are 7 months until the end of the year.

At the current rate of return of about 5% gain per month, if sustained, would translate to a 10,000 Phisix by the end of the year or at the first quarter of 2014.

The steepening of the ascending slope suggests of the deepening convictions of the bulls of the trend’s sustainability. Such convictions have now been strengthened by even more price increases.

But this seems to have morphed into more than just a reflexive feedback loop between expectations (shaped by prices) and outcomes (influenced by expectations); some people in social media have already been exuding an aura of invincibility by hectoring on very rare bearish international reports.

As I have said before[1], markets have hardly been pricing about “cheap” or “expensive” but about electrically charged emotions: Greed and Fear.

Sectoral returns have been demonstrating such dynamic.

Bulls have been swamping into popular investment themes, while the bears have frantically been smashing down what seems as ‘politically incorrect’ issues.

Bull markets tend to lift all, if not most issues, but apparently not this time.

Also, the annual rotational pattern has been broken. Instead of an alternating leadership as during the past 6-7 years, the mining sector has gone completely in the opposite direction of the general markets.

The decline in the mining issues has not been proportional. Some issues fell of the cliff where losses account for an astounding 50-70% from their recent zenith.

Such dramatic selloffs and declines already exhibit a state of depression with hardly any “corporate fundamentals” to account for. Others have been down by 20-30%. I may add that the biggest losers have been those with operations within the Benguet area, so I am wondering whether domestic politics may have been aggravated the dour sentiment which has been partly imported.

So, on the one hand we see intensive yield chasing phenomenon. On the other, we see panic. Greed and Fear.

But what should concern serious participants is not the “fear”, but the dominant “greed” as manifested by a ballooning mania.

And I wouldn’t exactly characterize “greed” in the conventional sense, but rather greed in the context of expansive risk appetite as consequences from various social policies.

The public has been motivated to speculate from easy money policies and from implied guarantees on the financial market, thus the market has responded in such rampant and destabilizing manner.

When we tax something we get less of it, but when we subsidies something we get more of it. So this applies to stock markets too: Current policies subsidize or reward “greed”, and at the same time, punish “prudence”.

Even the Jaime Caruana, the chief of the Bank of International Settlements, or the central bank of all central banks, have come to recognize and warn about this[2].

Global Equity Markets Melt-UP

Year-to-date, major global benchmarks have seen a return of a RISK ON environment as the levitation of equity markets has been accelerating.

The above table doesn’t give justice to the overall representation of the other bourses. This is due to the distortions from the magnified gains by Japan’s Nikkei which diminishes what should have revealed as outsized gains for developed economies and ASEAN equities

In the behavioral science field, this is called the perceptual contrast effect[3], where people’s judgement are shaped by perceptions framed from relative immediate or visible comparisons

Nonetheless, gains of major developed economies and ASEAN nations have been mounting while the BRICs seem to be recovering except for Brazil.

In observing price trends, the melt up in equity markets have become global.

The US major benchmark, the Dow Jones Industrials, as well as, Germany’s DAX index has shown upside acceleration.

As of Friday’s close, the Dow Industrials has been up 17.2% year-to-date while the German DAX has been up 10.32%. In 2012, the Dow yielded gains of 6% while the DAX 29%.

As I have recently pointed out[4], the surge in the DAX comes in contrast with Germany’s struggling economy. Germany managed to eke out a .1% growth during the first quarter of the year. Whereas the overall direction of growth since 2011 has been on a downtrend, yet the German DAX seems on a melt up mode.

This Isn’t Your Daddy and Grand Daddy’s Market

The most striking parallel universe phenomenon would be in France.

French financial markets will tell you of a booming economy:

The equity bellwether the CAC 40 has racked up gains of 9.89% year-to-date and was up 15.23% in 2012. Interest rates as measured by the French government 10 year yields[5] have been drifting at multi-year lows (see lower window).

So OECD France has a booming bond and the stock markets almost similar to the emerging market Philippines.

Ah, but France is not the Philippines. Ironically the French economy slipped into a recession in the first quarter of this year. For most of 2012, France has also been in periodical recessions. Yet the market booms. France was even downgraded by Moody’s last November[6]. But the stock and bond markets have ignored them. And this is why the French equity market seems in melt up mode even as the stagnating economy seems to intensify.

And given that the French economy has been hocked to the eyeballs with debt, as debt-to-gdp has been ballooning[7] since 2009, one would expect that the extended recessions would have amplified credit and market risks that should have roiled the financial markets.

But no, this time is different.

Bad news is good news. More signs of economic troubles translate to more prospects of accommodation from central banks. The more the bad news, the better for the financial markets.

In addition, central banks policies appear to have jaded the market’s perception of risks. French interest rates have gone down partly because of Japan government’s aggressive pursuit[8] of doubling her monetary base via “Abenomics”, where Japanese insurance and banking firms sought higher yields[9] (if not safehaven) from French bonds as shown above.

The Swiss National Bank (SNB) may have also been a party[10] to subsidizing the French government through accumulation of French bonds.

Or it could be that French institutions with international exposure could have been downsizing partly by selling their holdings abroad from which they repatriate to buy French bonds for reserve requirements purposes.

Charles Gave of the Gavekal Research opines[11]

France has a large financial sector, with huge international positions. Some entities may be selling international holdings which demand large reserve requirements. The proceeds are then brought back in France to buy French government bonds—against which there are no reserve requirements.

As I earlier said, current developments reveal that there hardly has been anything fundamental in the traditional or conventional understanding from which current markets operate on.

This isn’t your granddaddy or your daddy’s financial markets.

Or take a look at three national benchmarks above.

All of them are apparently in a melt-up mode. Year-to-date the chart at the left has yielded 45.63%, the center 29.45% and the right 61.92% as of Friday’s close.

The melt-up for these three bellwethers has a common denominator: they have been spiked by strong monetary forces.

Argentina’s Merval[12] (center) and Venezuela’s Caracas[13] (right) have both been enduring hyperinflation but in different phases[14], their stock markets are proving to be partial safehavens. On the left is Japan’s Nikkei[15]. Japan’s Nikkei 225 has skyrocketed from the government’s plan to double her monetary base which is really is in the direction of Argentina and Venezuela except that Japan policies are in an embryonic phase.

Thus the conventional and popular wisdom where today’s market has been one about growth, or fundamentals or political salvation will be proven wrong in the fullness of time.

Again this isn’t your granddaddy or your daddy’s financial markets.

[1] See Phisix 7,000: Why Asia’s Rising Star is a Symptom of Mania April 29, 2013

[2] See BIS Official: Loose Central Bank Policies Looking Increasingly Dangerous May 17, 2013

[3] ChangingMinds.org Perceptual Contrast Effect

[4] See Parallel Universe: Booming German and French Stocks as Economies Stagnate May 15, 2013

[5] Bloomberg.com France Govt Oats Btan 10 Yr Oat

[6] Guardian.co.uk Moody's downgrades France's credit rating to AA1 November 20, 2012

[7] Tradingeconomics.com FRANCE GOVERNMENT DEBT TO GDP

[8] Zero Hedge We Found The 'Other' Greater Fool May 13, 2013

[9] Businessinsider.com European Government Borrowing Costs Are Plunging — And It's All Thanks To Japan April 8, 2013

[10] Wall Street Journal Button-Down Central Bank Bets It All January 8, 2013

[11] Zero Hedge Charles Gave: "Get Out Of Banks, Get Out Of France - Get Out Of The Euro" May 16, 2013

[12] Bloomberg.com Buenos Aires Stock Exchange Merval Index

[13] Bloomberg.com Caracas Stock Exchange Stock Market Index

[14] See Inflation and Price Controls: Latin America Edition April 19, 2013

[15] Bloomberg.com Nikkei 225

Infographic: The Silver Squeeze

noreply@blogger.com (benson_te) — Sun, 19 May 2013 01:49:00 +0000

The following infographic courtesy of the Austrian Insider (hat tip Zero Hedge)

The Silver Squeeze – An infographic by the team at The Silver Squeeze Free Infographic

Quote of the Day: The Intelligencia pay no price for being wrong

noreply@blogger.com (benson_te) — Sun, 19 May 2013 01:37:00 +0000

Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.

This is from economic professor, author and political philosopher Thomas Sowell expounding a passage “The Intelligencia pay no price for being wrong” from his latest book Intellectuals and Race in a video interview with Wall Street Journal’s Peter Robinson. (hat tip Mises Blog)

Paying no price for being wrong can be seen in the same light as Nassim Taleb's “skin in the game”, the stakeholder’s dilemma or the principal agent problem—conflict of interests shaped by diverse incentives

This is very relevant not only to the participants of the financial markets but especially pronounced in public opinion arena where social policies are shaped. The crux: Bad ideas have consequences. And people with little “skin in the game” or “pay no price for being wrong” are the most notorious promoters of ‘noble sounding’ deceptive ideas.

War on Cash: Nigeria and Ghana Experiment with Cashless System

noreply@blogger.com (benson_te) — Sat, 18 May 2013 08:30:00 +0000

Governments and banksters have been trying their darn best to put the savings of their constituencies on their palms.

African nations of Nigeria and Ghana will be experimenting with cashless transactions.

The Nigerian program from theNextweb.com

Last week at the World Economic Forum on Africa held in Cape Town, South Africa the Nigerian National Identity Management Commission (NIMC) and MasterCard announced their collaboration with plans to roll-out an initial 13 million MasterCard-branded National Identity Smart Cards with electronic payment capability.

The 13 million cards will form part of a pilot program which will see the West African country’s citizens who are 16 years and older and those who have been residents in Nigeria for more than two years being issued with the new National Identity Smart Cards.

This announcement by Nigeria sees it following in South Africa’s footsteps as the country’s Department of Home Affairs has announced that it intends starting to issue smart ID cards to citizens starting in July, 2013 at a rate of 3 million smart ID cards a year.

It is hoped in both cases that the smart ID cards will help curb the prevalent fabrication of false identity documents in both Nigeria and South Africa as they will be embedded with microchips and with the South African smart ID cards being reported to incorporate biometric features that will also prevent identity theft as a result of the fraudulent use of a stolen or lost smart ID card.

There is also a notable difference between the South African and Nigerian smart ID cards with the West African country’s smart ID cards coming with immediate payment capability’s courtesy of MasterCard’s prepaid payment technology. The cards are also reported to come loaded with 12 other applications.

The cashless project in Ghana from the spyghana.com

Ghana, as a developing country in West Africa has taken the initiative to introduce a system where businesses can be done without using physical cash. Bank of Ghana, the regulator of the banking industry through Ghana Interbank, Payment and Settlement Systems (GhiPPS) introduced e-zwich card, where Ghanaians will feel comfortable in using the card to transact businesses rather than physical cash.

Even though there has been several effort to educate the masses about the product, the education on this e-zwich have not go well with many Ghanaians. A lot of the citizens as of today do not even know there is something called e-zwich card. With a population more than half of it been illiterate, there must be a thorough education where all Ghanaians will understand and use the platform.

In Ghana, some of the common cards we can identify are such as Sika Card by SSB, Visa Horizon by Standard Chartered Bank (Stored Value cards), deployment of Automated Teller Machines (ATM) and ATM cards by banks eCard (CAL Bank, Ecobank) and among others.

Harmless they all seem. But centralization means that people's lives will increasingly be subject to government control. Identity cards can be easily altered, changed or subjected to manipulations upon government's whim. These will be like sci-fi movies where people's identities can be wiped out or expunged through programming: You are alive, but you don't exist says the system

This also shows why governments will attack gold, bitcoins and cash, and in their stead promote centralized systems based on national IDs complimented by facilities of digital cash payments systems and other 'flavoring' or "add on" called applications. Such systems will make confiscations and totalitarianism a cinch.

Why the Indian Government’s War on Gold will Fail

noreply@blogger.com (benson_te) — Sat, 18 May 2013 07:46:00 +0000

Prime Minister’s Economic Advisory Council (PMEAC) Chief C Rangarajan has declared that India’s love affair with must be contained. Gold imports must be substantially reduced from 1,000 tonnes a year to 700 tonnes.

The imperative to contain gold import has become urgent. The recent surge in gold demand is however creating some distortions and need to be rolled back to boost growth by reversing the trend of declining financial savings and keeping CAD* within prudent limit by contain gold demand.

*CAD-Current Account Deficit

India’s government has essentially placed the burden of the Indian economy on gold. And in doing so, they justify the reinforced holistic campaign against the precious metal.

Coincidentally, India’s stepped up war on gold comes amidst the ongoing Wall Street incited crash.

The Mineweb’s Shivom Seth wonderfully explains how the campaign against gold by India’s government is being orchestrated through various fronts.

First India’s government proposes to provide an inflation hedge alternative: government inflation indexed bonds (bold mine)

It could have posed as a model scheme to curtail gold imports. In order to stifle India’s appetite for gold, the government has introduced inflation index bonds. The first tranche amounting to around $364 million (R20 billion) is to be introduced on June 4.

Inflation Indexed Bonds (IIBs) are a new category of debt instruments to be introduced in India, where the coupon and principal amount would be linked to the rate of wholesale price inflation with a lag of four months. The authorities have said the objective of introducing such bonds is to channelise savings into productive sources of instruments from unproductive ones like gold.

Slowly but surely, there seems to be an anti-gold campaign that is at play in India. The concerted effort by the Indian government to discredit gold by imposing several curbs, and channelise consumers away from the precious metal, indicates a desperation that has not gone unnoticed by savvy investors.

“The government is making it too expensive for retailers to sell gold, especially when prices have hit new all-time lows. Retailers are forced to apply hefty mark-up given the new curbs,” said Manohar Kedia, of Kedia Jewellery House.

Government inflation indexed bonds are being forced upon the average Indians, as the Indian government’s onslaught to curb the gold trade has intensified.

India’s war on gold now covers higher taxes or tariffs and import bans and limits.

Knowing fully well that Indians cannot keep away from gold for long, the Reserve Bank of India first hauled up banks for selling gold coins, then came down hard on gold retailers and bullion houses. Now, they have turned their attention on investors, urging them to invest in debt instruments.

Further, in order to moderate the demand for gold for domestic use, the government has also restricted the import of gold on a consignment basis. A major bullion retailer in Mumbai said this would prove to be a major hurdle for exporters.

For, only those exporting gold jewellery will first have to impose on banks for each consignment, given that banks will henceforth be allowed to import gold only to meet the genuine needs of exporters of gold jewellery.

The Indian government's genuine but unstated objective have been to capture or corral people’s savings, by diverting them into the government regulated or controlled banking system, and use such savings to finance a chronically insatiable and profligate government.

India's "declining financial savings" has hardly been because of gold but because of rapacious government spending.

India’s government has more than doubled the rate of spending over the past 9 years. Such spending binge has exploded the the government’s budget deficits since 2009. (charts from tradingeconomics.com)

The intensive growth in food subsidies has been part of the such spending spree, as shown by the chart above from the Reuters. Food subsidies are expected to swell by about 40% in 2014.

The Indian government has been subsidizing many industries. Subsidies according to Wikipedia accounts for 14% of the the Indian economy in 2015 (note: not government budget).

Yet subsidies has led to huge losses: as much as 39% of subsidized kerosene has been stolen, and as I pointed out last year, politicians looted food subsidies to the tune of $14.5 billion!

Aside from food subsidies, the Indian government has joined the global bandwagon of stimulating the economy nearly a year ago or in June 2012, with various forms of fiscal spending mostly in infrastructure. Thus the spending ratios should be more today

Such lavish spending has resulted to expanding the debt.

Even as debt to GDP has been shrinking, the Indian government’s external debt has massively ballooned over the same period.

This only means that the accrued government spending has been funded by debt acquired from external sources.

Again the debt to gdp metric is hardly a reliable statistical indicator because the denominator (GDP) can be driven by a credit boom and not by real growth. This is currently the case with India. India’s domestic credit to private sector has reached the highest level ever at 50.6% in 2011. India has an ongoing bubble.

While India’s foreign reserves remain near record highs, exploding fiscal deficits and ballooning external debt has led to sustained weakness in her currency, the Indian rupee.

In short, the frantic Indian government has been passing the blame on gold on what truly has been a problem of political greed via fiscal intemperance.

Importantly, the Indian government’s attack on gold represents a duplicitous move.

While the government wants access on the private sector’s savings via the banking system (which aside from funding governments will incur various taxes and fees), the desire to reduce the public’s gold holdings by holding paper money, the rupee, means governments would also impose “the inflation tax”.

So bank depositors will be hit by low interest rate, inflation tax, various fees and will be forced to hold and finance government debt, in favor of the government (who may default).

One can’t rely on statistical inflation figures to accurately represent real conditions. Statistics are likely to be manipulated for the purposes of financial repression or government plunder of private sector resources. Thus, much of the average Indians will unlikely fall for such 'inflation indexed bonds' subterfuge.

So like anywhere else, governments have been resorting to direct and indirect confiscations with increasing frequency and intensity.

Signs of boom days eh?

More entwined reasons why India’s war on gold will fail.

Gold has both cultural and monetary essence to the average Indians.

As the Deccan Gold Mines enunciates: (bold mine)

Over centuries and millennia, gold has become an inseparable part of the Indian society and fused into the psyche of the Indian. Having passed through fire in its process of evolution it is seen as a symbol of purity, the seed of Agni, the God of fire. Perhaps this is why it is a must at every religious function in India. Gold has acted as the common medium of exchange or the store of value across different dynasties in India spanning thousands of years and countless wars. Thus wealth could be preserved inspite of wars and political turbulence. For centuries, gold has been a prime means of saving in rural India.

Next as related to the cultural-religious context, India’s history has been littered with economic crises and even currency problems

To account for a recent history here is Wikipedia

Since 1950, India ran into trade deficits that increased in magnitude in the 1960s. The Government of India had a budget deficit problem and therefore could not borrow money from abroad or from the private sector, which itself had a negative savings rate. As a result, the government issued bonds to the RBI, which increased the money supply, leading to inflation. In 1966, foreign aid, which was hitherto a key factor in preventing devaluation of the rupee was finally cut off and India was told it had to liberalise its restrictions on trade before foreign aid would again materialise. The response was the politically unpopular step of devaluation accompanied by liberalisation. The Indo-Pakistani War of 1965 led the US and other countries friendly towards Pakistan to withdraw foreign aid to India, which further necessitated devaluation. Defence spending in 1965/1966 was 24.06% of total expenditure, the highest in the period from 1965 to 1989. This, accompanied by the drought of 1965/1966, led to a severe devaluation of the rupee. Current GDP per capita grew 33% in the Sixties reaching a peak growth of 142% in the Seventies, decelerating sharply back to 41% in the Eighties and 20% in the Nineties.

Aside from the rupee chart above, the following table shows how the rupee slumped relative to the US dollar from a conversion rate of 4.79 rupee/US in 1950 to 45.83 rupee/US in 2010.

One would also notice that from a base point of zero in 1975, inflation surged to 126 in 2010. And despite the plummeting rupee, through 1975 per capita income as % of the US has gyrated from 1.5% to 2.18%. This means that whatever growth India has posted over the years has failed to keep at the rate of the growth in the US.

In short, devaluation has not solved what has been a problem of politicized economy.

This brings to fore the lessons from the great Austrian economist Ludwig von Mises

The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modem equipment, are therefore producing much less per man-hour, and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.

There is only one way that leads to an improvement of the standard of living for the wage-earning masses — the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.

What India requires is not to regulate or prohibit gold but to further liberalize or depoliticize the economy.

Unfortunately politics is about smoke and mirrors rather than the upliftment of the general welfare

Another huge reason such campaign will fail is due to the informal economy.

The informal economy means low banking penetration levels.

From DNB.com.in

With regard to financial access and penetration, India ranks low when compared with the OECD countries. India offered 6.33 branches per 100,000 persons whereas OECD countries provided for 23-45 branches per 100,000 people in 2009. For India, the number of branches and ATMs per 100,000 persons has increased to 7.13 and 5.07 in 2010.

In India, the penetration of banking services is very low. Merely, 57% of population has access to a bank account (savings) and 13% of population has debit cards and 2% has credit cards. This represents the unmet demand and the scope for expansion for the banks in India.

And prohibition of gold and offering inflation indexed bonds as alternative will hardly improve on banking penetration levels hobbled by overregulation.

And because of intensive politicization of the Indian economy, a significant segment of India’s growth has been in the informal economy

From Businessworld/Bloomberg: (bold mine)

The size of India’s “informal” economy, meanwhile, handicaps efforts to track the number of Indians who are gainfully employed. Four out of five urban workers—who collectively produce an estimated three-quarters of the country’s output—are informally employed. That means their work does not show up in official figures on productivity, innovation, social mobility and other standard metrics of progress. It’s possible to debunk some of the myths about India’s work force—three-quarters of self-employed workers in urban areas, for example, are in single-person businesses or family enterprises without hired labor, rather than upwardly mobile entrepreneurs—but a clear picture of exactly how many Indians are working, and where, remains elusive.

The informal economy, hence, represents political or government failure from which India's government has taken gold as the 'fall guy'.

Finally, gold fits to a tee the informal economy

From the Economist (bold mine)

Pune’s wide boys aside, the traditional gold consumers are southern peasants buying jewellery. They have no access to formal finance; gold requires no paperwork, incurs no tax and is liquid. But over the past decade the mania has spread. By weight consumption has doubled, for several reasons: a surge in money earned on the black market; investors chasing the gold price; and the dismal returns savers get from deposit accounts. Real interest rates are low, reflecting high inflation and a repressed financial system that is geared to helping the state finance itself.

Another significant factor why the war on gold will fail is political insanity: doing things over and over again and expecting different results.

Attacking gold as part of financial repression measures has previously failed, it shouldn't be different this time

From the same Economist article:

India has tried coercion. Between 1947 and 1966 it banned gold imports. After that it used a licensing system. Neither worked. Smuggling soared and policymakers were reduced to tinkering with airport-baggage allowances. By 1997 trade was liberalised.

All these political pretenses which are really intended as confiscations of private savings whether through gold, cash transactions, bank deposits or bitcoins (cryptocurrencies) will eventually be exposed for the fraud they are.

India's war on gold will only intensify the growth of smuggling and the informal economy.

India's war on gold signifies also an expression of growing desperation by the Indian political class over their hold on power whose economy has partly been buoyed by credit bubbles.

India's war on gold could likewise be a part of the grand design of the cabal of political institutions or the banking system, central banks and welfare warfare states led by Wall Street in working to preserve the current unsustainable system by spreading disinformation and by the manipulation of the markets in order to dissuade the public on currency alternative options as gold or bitcoins.

US Federal Reserve’s James Bullard: Why Unemployment Targets Won’t Work

noreply@blogger.com (benson_te) — Sat, 18 May 2013 01:33:00 +0000

For the mainstream, macro-policies such as inflationism has been immensely expected to solve “micro” problems. The popular wisdom specifically fixates on the “money illusion” or “price illusion” effects of inflationism, where experts see people as having the tendency to think of currency in nominal, rather than real, terms (wikipedia).

In short, so-called experts think that people hardly think at all. Everyone of us, except them, are boneheads.

The premise where people can hardly feel, notice and respond to the changes in the purchasing power of their nominal currency serves as justification for governments to manipulate money supply intended to DECEIVE people into attaining so-called economic objectives, like lowering real value of wages. (So much for so-called "virtuous" and "transparent" governments)

Well it does seem that even some officials of the US Federal Reserve recognize the folly of such premise.

Austrian economist Joseph Salerno at the Mises Blog refers to the dissent by US Fed President of St. Louis James Bullard on unemployment targets: (bold mine)

The Fed has committed itself to maintaining its zero interest rate policy as well as quantitative easing for as long as the unemployment rate remains above 6.5 percent (and inflation rate below 2.5 percent). James Bullard, the President of the Federal Reserve Bank of St. Louis, heroically dissents from this policy of unemployment targeting, which is basically a reversion to the crude and discredited Old Keynesian doctrine. In a speech last month entitled “Some Unpleasant Implications for Unemployment Targeters”, Bullard, himself a New Keynesian inflation targeter, stated:

Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions. . . . monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems.

Unfortunately, President Bullard did not articulate those “more direct labor market policies,” but they would include: the repeal of minimum-wage legislation, which destroys jobs for the unskilled; the repeal of the National Labor Relations Act, which coerces employers into collective bargaining and privileges union “insiders” against non-union “outsiders” causing unemployment or lower wage rates among the latter; and the phasing out of unemployment “insurance,” which encourages unemployed workers to spend an excessive amount of time in “searching” for jobs.

In short, mainstream’s oversimplification of micro conditions as merely driven by a SINGLE variable (price levels) signifies as arrant myopia.

There are many more or equally important factors, such as the state of property rights and other political hurdles (regulatory environment, taxes, mandates, unionism and etc..) that influence people’s incentives to conduct commercial activities.

Moreover, price level manipulation theories hardly ever consider the invisible (opportunity costs) and the secondary effects of such policies: particularly price instability (boom bust cycles, stagflation, hyperinflation) and economic discoordination.

The reality is that so-called economic objectives have been used as front or as excuse for the real design: transfer of wealth from society to the political class and the politically connected groups.

Ironically, the gist of the wisdom of economic talking heads which mainly belittles on people’s capacity to think, is founded on self-deception (from highly flawed model based assumption) and on the pandering to the political class.

Yet many fall prey to the political contrivance, "lies told often enough becomes the truth"

Heroes of Capitalism: The Humble Shipping Container

noreply@blogger.com (benson_te) — Fri, 17 May 2013 07:02:00 +0000

Many people hardly appreciate on the role played by the advances in technology in shaping social progress. Think the discovery of fire which initially allowed humans to cook, obtain warmth and protection. Fire eventually became important part of production.

Other milestone innovative technologies such as the Gutenberg printing press, the steam engine and today’s internet has dramatically transformed people’s lifestyle.

For the majority, technology advances “just happens”, they hardly have an inkling of how these things take place.

There is one significantly underappreciated hero of global trade: the shipping container

The Economist explains: (hat tip Prof Mark Perry)

THE humble shipping container is a powerful antidote to economic pessimism and fears of slowing innovation. Although only a simple metal box, it has transformed global trade. In fact, new research suggests that the container has been more of a driver of globalisation than all trade agreements in the past 50 years taken together.

Containerisation is a testament to the power of process innovation. In the 1950s the world’s ports still did business much as they had for centuries. When ships moored, hordes of longshoremen unloaded “break bulk” cargo crammed into the hold. They then squeezed outbound cargo in as efficiently as possible in a game of maritime Tetris. The process was expensive and slow; most ships spent much more time tied up than plying the seas. And theft was rampant: a dock worker was said to earn “$20 a day and all the Scotch you could carry home.”

Containerisation changed everything. It was the brainchild of Malcom McLean, an American trucking magnate. He reckoned that big savings could be had by packing goods in uniform containers that could easily be moved between lorry and ship. When he tallied the costs from the inaugural journey of his first prototype container ship in 1956, he found that they came in at just $0.16 per tonne to load—compared with $5.83 per tonne for loose cargo on a standard ship. Containerisation quickly conquered the world: between 1966 and 1983 the share of countries with container ports rose from about 1% to nearly 90%, coinciding with a take-off in global trade (see chart).

The container’s transformative power seems obvious, but it is “impossible to quantify”, in the words of Marc Levinson, author of a history of “the box” (and a former journalist at The Economist). Indeed, containerisation could merely have been a response to tumbling tariffs. It coincided with radical reductions in global trade barriers, the result of European integration and the work of the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organisation (WTO).

Read the rest here.

It is unfortunate that media and politics has successfully implanted on the public of the false importance of the short term or temporary visible gains of specific personalities or groups, such that "heroes" are characterized by victors of zero-sum activities, particularly in sports, the celebrity gossip culture and in politics.

Yet the real heroes are those inventions or ideas that ingloriously radicalized improvements on the way we live over the long run.

BIS Official: Loose Central Bank Policies Looking Increasingly Dangerous

noreply@blogger.com (benson_te) — Fri, 17 May 2013 04:29:00 +0000

The chief of the central bank of global central banks, the Bank of International Settlements, has warned of unintended consequences of prolonged easy money policies

From the Wall Street Journal Real Times Economics Blog: (bold mine)

The latest to take up the refrain is Jaime Caruana, general manager of the Bank for International Settlements, who warned in an unusually frank speech in London that, while the ultra-low interest rates and ultra-easy monetary policy adopted by advanced economy central banks might have been the right response to the crisis when it broke, they are looking increasingly dangerous the longer they last.

“A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they actually can deliver,” Mr. Caruana said. “This may ultimately undermine their credibility and, with it, their legitimacy and effectiveness.”

Low rates may have helped keep banks alive and keep a roof over the heads of overextended borrowers—but they are threatening the ability of insurance and pension funds to meet their commitments, and tempting them into all kinds of wrong investment decisions in the meantime. Although he didn’t spell it out, he painted a picture of a massive and stealthy transfer of wealth from savers to borrowers.

Perhaps Mr. Caruana may have noticed of the growing disparity between asset markets and the real economy and how such policies have been failing to generate the much anticipated results.

Importantly, Mr. Caruana notes of the ethical inequities from the “massive and stealthy transfer of wealth” which in reality is taken from society (those not politically connected) and transferred to the political class and politically privileged banksters and other cronies.

The article suggest the BIS’s view should be heeded because “the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.”

This represents that cognitive bias called anchoring. In reality, past performance does not assure of future outcomes. Correct prediction by the BIS in the recent past doesn’t necessarily hold that they will be as accurate in the future.

What makes the BIS council worthwhile is the economic and the epistemological reasoning behind the analysis of current du jour easy money policies.

For instance, Mr. Caruana implicitly points to the moral hazard as consequence from such policies, noting that instead of real reforms, politicians have used central bankers as instruments to maintain the status quo.

From the same article:

Like many central bankers, Mr. Caruana put a good deal of the blame for the current mess on governments for failing to address the root causes of unemployment and low growth. “After five years of buying time, one has to ask whether that time has been – or will be – used wisely,” he said.

Likewise he warns of the anchoring bias applied to looking at inflation risks…

But he reserved a decent measure of criticism for central banks too, warning that they can’t just shut their eyes to the risks they are creating just because a certain measure of domestic consumer inflation is within its official target range.

…and of bubble cycles:

“If you don’t get financial stability, you will not be able to get price stability,” he said in follow-up comments to his speech, making clear that he understood financial stability as something to be defined globally, not just in a single country or region. That’s a problem because no central bank in the world is mandated to give a hoot about what effects its policy causes outside its jurisdiction. With an eye on the huge cross-border capital flows triggered by radical central bank action, he warned his audience how easy it is, in a globalized world, for distortions created in one country to spill over into other countries before returning “like a boomerang” to haunt the originating country.

So very apropos.

Seems like Mr. Carauana, a telcom engineer by education, has revealed tinges of influence from Austrian economics.

The BIS has been no stranger to the Austrian school. Canadian economist, William R. White, former manager in the monetary and economic department has been reputed as one of the Austrian s chool influenced economist in the BIS. In fact, it was Mr. White's paper in 2006, during his tenure, that accurately predicted the crisis of 2007-2008, from which the reputation of the above article rests on.

The US Housing Bubbles Deepens

noreply@blogger.com (benson_te) — Fri, 17 May 2013 02:50:00 +0000

Bubbles are being blown everywhere. The bubble in the US housing markets, which I have been pointing out, seems to be spreading and or intensifying.

The Bloomberg reports: (bold mine)

Just a year since the U.S. housing market hit bottom after the biggest plunge in eight decades, signs of excess are re-emerging.

An open house for a five-bedroom brownstone in Brooklyn, New York, priced at $949,000 drew 300 visitors and brought in 50 offers. Three thousand miles away in Menlo Park, California, a one-story home listed for $2 million got six offers last month, including four from builders planning to tear it down to construct a bigger house. In south Florida, ground zero for the last building boom and bust, 3,300 new condominium units are under way, the most since 2007.

The U.S. spring homebuying season has been marked by a frenzy of demand fueled by the Federal Reserve’s drive to push down borrowing costs, a scarcity of listings and Wall Street’s new appetite for foreclosed homes. While values remain well below their peak, economists including Stan Humphries of Zillow Inc. (Z) and Mark Vitner of Wells Fargo & Co. assert prices in some areas are rising at an unsustainable pace -- a dramatic shift from early 2012, when billionaire Warren Buffetts aid housing “remains in a depression.”

Why signs of bubbles? (bold mine)

U.S. home prices jumped almost 11 percent in March from a year earlier, the biggest gain since the height of the real estate boom in 2006, CoreLogic Inc. reported last week. Values are rising faster than incomes, an indication that prices may fall in some cities once higher mortgage rates erode affordability, Humphries said. Investor purchases will inevitably cool, adding another potential hit to the market, according to Vitner.

The gains in some U.S. areas aren’t sustainable for a healthy market, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“If prices keep going up at this rate for another six months, we will have a bubble, and people will get hurt,” he said in a telephone interview.

U.S. buyers spent three times their annual incomes on homes at the end of last year, and those properties were 15 percent pricier relative to incomes than before the housing bubble of the mid-2000s, according to data from Seattle-based Zillow (Z). Markets such as Silicon Valley, Southern California, Boston and New York will look expensive relative to incomes when mortgage rates rise, Humphries said.

People buying more than their income means acquisition through debt financing or increasing exposure on leveraging.

This shows that extended price gains of any assets can only be fueled by credit expansion.

Euphoric or manic (frenzy) actions signify a reflexive feedback loop between expectations shaped from (rising) prices and outcome as a consequence of (buying) action. Such is the yield chasing phenomenon financed by debt.

As one would note, US stocks and real estate, which are titles to capital goods, have been booming even when statistical economic growth continues to wobble. The annual growth rate of the US economy has hardly topped the 2000 and 2004 highs.

So like elsewhere we are seeing “parallel universes” or price-reality distortions which are symptoms of bubbles.

Pimco’s chief Bill Gross mostly shares my view of a global pandemic of bubbles—as quoted by Zero Hedge (bold original)

We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well.

The only difference is that Mr. Gross seems to downplay or soften on the repercussions, perhaps out of political correctness.

Yet if every action has an equal and opposite reaction then for every boom is a corresponding bust. Ramifications will certainly not be pleasant.

If central banks continue to inflate amidst a bursting the bubble, then the bust morphs into an inflation/currency crisis.